Walter Schloss Investing Screen: Scrutinising the list of New Lows

In Brief

A value investing screen in the Graham school based on Schloss's focus on stocks that are hitting new lows and those trading at a price lower than their book value per share.

Background

Walter J. Schloss studied under Ben Graham in 1935 and then worked with him. In 1955, Schloss left Graham's company and started up his own investment firm. Schloss' son, Edwin joined the fund in 1973 and the two of them closed out the fund in 2000 and Walter stopped actively managing others' money in 2003. He was a very humble investor working from the same one-room office over the whole period. He didn't t talk to management teams as he felt he wasn't good at evaluating management character. He didn't use a computer / the internet but liked to look intensively at the numbers (ValueLine and annual reports).

Definition of a Schloss Screen

A stock at or near its 52-week low price - Being at / near a low could signal a possible bargain stock, although it is important to distinguish between temporary and permanent problems. As Greenwald notes, Walter and Edwin Schoss quot;scrutinize[d] the new lows list to find stocks that have come down in price. If they find stocks is at a two or three year low, so much the better".

No long-term debt - Schloss avoided companies with much debt as this increased the risk profile of the investment.

Price Less Than Book Value per Share - Schloss saw it as a potential bargain if the price per share was below the book value per share. Buffett said that Schloss "doesn't worry about whether it's January…whether it's Monday…whether it's an election year. He simply says if a business is worth a dollar and I can buy it for 40 cents, something good may happen". His son, Edwin, was more flexible in wanting some asset protection but being more willing to look at a company's earnings power.

Insider Ownership above average for the industry - Schloss wanted company management to own stock in the company.

Long Price History - Schloss liked to look at where a stock was ten or more years ago so he valued the long financial history available in ValueLine.

Does it work?

Over the 45 years from 1956 to 2000, Walter's fund earned a CAGR of 15.7%, compared to the market's return of 11.2% annually over the same period, hence Buffett's reference to Schloss as a quot;super investorquot;.

How can I run this Screen?

Watch Out For

Schloss did not buy foreign companies on the basis that it is not easy to judge foreign companies and insiders had too much advantage overseas. He advised stayed away from industries that are outside of one's circle of competence and was more comfortable with very old industries, especially manufacturing.

In general, he aimed for a 50% profit from any holding before selling. If a stock's price is falling and the company's fundamentals are sound, he would buy more.

Schloss believed in significant diversification beyond what some value investors would recommend - sometimes up to 100 stocks - with a maximum holding in one stock of not more than 20% of the portfolio. However, he noted:

"The thing is, we don't put the same amount in each stock. If you like something like Northwest Industries, you put a lot of money in it. But we may buy a little bit of stock, to get our feet wet, and get a feeling for it. Sometimes if you don't own a stock, you don't pay enough attention".